Emeritus Professor Ron Bird

Biography

Professor Ron Bird completed a master's degree in Economics at Monash University prior to taking up a lectureship at Macquarie University in 1970. In 1973, he moved to the Economics Faculty at the Australian National University where he headed up the Commerce Department and taught undergraduate and postgraduate courses in accounting and finance. He left the ANU in 1988 and was subsequently awarded the title of Emeritus Professor by that University.

After leaving the ANU in 1989, Professor Bird embarked on a career in the private sector. His first position was with Towers Perrin where he was in charge of their asset consulting practice and also of their global research unit. Professor Bird left Towers Perrin in 1992 to enter funds management. His first position was with Westpac Investment Management where his responsibilities extended to the development and application of quantitative techniques to funds management, the development and implementation of derivative strategies and all aspects of performance. From Westpac, Professor Bird moved to establish a new Sydney-baded quantitative funds management firm, in a joint with Grantham, Mayo, Van Otterloo (Boston) for whom he also coordinated their global research activities.

From Westpac, Professor Bird moved to establish a new funds management firm, as a joint with Grantham, Mayo, Van Otterloo (Boston). This firm concentrated on developing quantitative techniques for the equity markets in the region, marketing the GMO funds in Australia and being part of GMO's global research activities. Besides being the manager of the local activities, Professor Birds was also responsible for coordinating GMO's global research activities.

Professor Bird returned to academia at the beginning of 1999 and joined the Finance School at the University of Technology Sydney. However for several years until the end of 2002 he continued on in his role of coordinating GMO's global activities. Since the beginning of 2003, he has conducted several projects for organizations in the financial services sector which included devising the investment strategy for MIR Investment Management. AT UTS, he has taught honours and masters subjects in the areas of corporate finance and investments, coordinated the Schools’s honours program and more recently taken on the role of Director of the Director of the Paul Woolley Centre for Capital Market Dysfunctionality.

Professor Bird's research has largely been concentrated in the investments areas and that areas interface with financial reporting. His research up to 1988 concentrated in areas such as the market for accounting information, various aspects of portfolio insurance and the efficiency of gambling markets. Since 1999, his interest have progressively moved towards increasing our understanding of the extent to which markets fail and the costs imposed on the community as a consequence of these failures. He has published numerous articles in Australian and overseas journals, made conference presentations in numerous countries and held visiting positions at several prestigious American and British Universities. He was the co-author of the first Australian corporate finance textbook in Australia and also more recently has co-authored an Australian version of a very successful US corporate finance text.

The post-earnings announcement drift (PEAD) first identified over 40 years ago seems to be as much alive today as it ever was. Numerous attempts have been made to explain its continued existence. In this paper we provide evidence to support a new explanation: that the PEAD is a reflection of the level of market uncertainty and sentiment that prevails during the post-announcement period. The finding that uncertainty plays a role in explaining how investors respond to information suggests that it should be included as a factor in pricing models while the fact that market sentiment also has a role is another instance of the importance of human behaviour in establishing prices

This paper is the first to conduct an event study on the market response to exploration, resource and reserve announcements made by mining firms. Results from an event study using a matched firm approach suggest that markets react positively to both the exploration and the resource announcements at the time of their release but find no information value in the reserve announcements possibly because all of the information in these announcements has been anticipated by the market and/or contained in prior announcements.

The duo IPO anomalies of underpricing and long run underperformance have inspired a plethora of studies. Yet few have examined the impact of majority investors in IPOs, namely institutional investors. Consistent with previous studies, we found large underpricing which was greatest in those issuers with the highest initial institutional ownership. Yet these issuers experienced the worst long?]run underperformance which casts doubts over the informed?]trading hypothesis. The findings are consistent with overreactions driven by informational cascade in the IPO market. High level of initial institutional interests generates informational herding that drives these issuers?f prices beyond the fundamental. Over time, market correction leads to the long?]run underperformance. Our results cast a somewhat different light on institutions?f role in IPOs, rather than being a valuable source of price discovery; Institutions may be a force of destabilization in what is already an event wrath with uncertainty.

Financial analysts are viewed as playing an important intermediary role in gathering and interpreting data and thus converting it into useful information for the investment community. However, in recent years, it has become more apparent that the analysts come under much internal and external pressure when making their forecasts and recommendations. Jegadeesh et al (2004) have highlighted that this results in US equity analysts being biased towards large, high momentum growth stocks when making their recommendations which presumedly causes them to add little or no value in their own right. However, they find that the analysts? recommendations changes do provide useful incremental investment insights. Azzi and Bird (2005) when evaluating Australian analysts similarly found that it was only the recommendation changes that provided useful information to investors. However, they also found evidence to suggest that the analysts attempt to adjust the biases in their recommendations over the market cycle. The implication being that biases identified in the Jegadeesh et al study may have been as much a reflection of the analysts pursuing the types of stocks that were performing well during the period rather than any long-term bias in these recommendations.

Little empirical work has been done on infrastructure as an asset class despite increased allocations by institutional investors. We build a robust factor model of infrastructure returns using US and Australian infrastructure and utility data to test manager claims that infrastructure investments offer benefits via a combination of monopolistic and defensive assets. We find evidence of excess returns and inflation hedging, but not of defensive characteristics. We compare option-based models designed to replicate infrastructure asset returns, and identify the regulatory risk premium. A combination of inflation linked bonds and covered call strategies results in improved defensive and inflation hedging characteristics.

Post-earnings announcement drift (PEAD) which was first identified over
40 years ago seems to be as much alive today as it ever was. Numerous attempts have been
made to explain its continued existence. In this paper we provide evidence to support a new
explanation: that the PEAD is a reflection of the level of market uncertainty and sentiment
that prevails during the post-announcement period. The overriding conclusion from our
analysis is that both uncertainty and sentiment play a central role in determining investor
behaviour and it is this behaviour that ultimately determines the pricing that is observed in
financial markets.

Does diversification using a basket of the most common alternative investments outperform diversification using low-cost, liquid risk premia? Investment banks have recently begun offering access to such risk premia at low cost. First, the authors confirm that alternative assets may reduce portfolio risk, based on historical experience. Second, they compare the risk-reduction benefits of alternative investments and risk premium portfolios out of sample, using equally weighted and least-risk optimized portfolios. They find that risk premia diversify more efficiently than do alternative asset portfolios. The authors suggest that an optimal portfolio combines the benefits of both risk premium and alternative asset portfolios, as some alternative assets (such as timber or managed futures) continue to provide exposure to unique sources of return.

Over any 12-month period, there is an enormous difference between the returns realised from investing in the best- and worst-performing stocks. We investigate the characteristics of these stocks and find that they share several features: extreme performers tend to be small companies that have volatile share prices and spend significant amounts of money on research and development. Accounting variables tend to be useful in separating out the best and worst performers; the latter also tend to be smaller companies which have lower share prices.

Half a century of analysis has yet to fully answer why investors place such a large proportion of their funds with active equity managers, given the discouraging evidence on the latter's ability to add net value. From the voluminous literature on manager performance we conclude that there is some, but limited, evidence that can rationally justify hiring active managers. The weakness of the evidence leads us to ask, Why do investors favor active equity management to the extent they do? To help answer this question, we conducted two online surveys, one of Chief Investment Officers of predominantly large Australian superannuation (i.e., pension) funds and another of asset consultants. The results confirmed that the industry is captive to a pervasive prior towards active management. The prior is reinforced by a competitive environment and supported by a complex mix of behavioral, agency, organizational, and cultural factors

It has long been accepted that risk plays an important role in determining valuation where risk reflects that investors are unsure of future returns but are able to express their prior expectations by a probability distribution of these returns. Knight (1921) introduced the concept of uncertainty where investors possess incomplete knowledge about this distribution and so are unable to formulate priors over all possible outcomes. One common approach for making uncertainty tractable is to assume that investors faced with uncertainty will base their decisions on the worst case scenario (i.e. follow maxmin expected utility). As a consequence it is postulated that investors will become more pessimistic as uncertainty increases, upgrading bad news and downgrading good news. Using Australian data, we find evidence that investors react to bad news at times of high market uncertainty but largely ignore good news which is consistent with them taking on a pessimistic bias. However, we also find evidence of the reverse when market uncertainty is low with investors taking on an optimistic stance by ignoring bad news but reacting to good news. We also find that the impact that market uncertainty has on the reaction of investors to new information is modified by the prevailing market sentiment at the time of the announcement. Besides throwing light on the question of how uncertainty impacts on investor behaviour, our findings seriously challenge the common assumption made that investors consistently deal with uncertainty by applying maxmin expected utility.

Information on the link between market performance and corporate social responsibility (CSR) activities provides an indication of the extent of acceptance by investors of these types of activities. The nature of this relationship is of critical importance for management trying to reconcile the demands of the company's shareholders with those of a much wider group of stakeholders and for investors pursuing a socially responsible investing strategy. Using an international database we investigate the extent to which expenditures on CSR activities are valued across market in six countries/regions. We find that CSR activities are highly valued by the investors in the European markets, where our findings clearly indicate that such activities lead to higher market valuations. In the US, Japan and Australia expenditures on CSR activities have a neutral impact on company valuation, which is still a good outcome for management who wish to incorporate into their decision process the objectives of a wide spectrum of stakeholders and for investors wishing to tilt their investments towards the more socially responsible companies.

This article analyses the extent of the excess returns that can be generated within the European markets by rotating ones portfolio between value and growth stocks. Academic and professional attention has been devoted in the past to the analysis of the potential value-enhancement generated by rotation strategies based on macroeconomic models and applied to value and growth portfolios and/or indexes. We demonstrate that such models can be employed successfully to rotate between value and growth portfolios that are formed using traditional valuation metrics. However, we find that the value-enhancing potential of such rotation strategies is eroded when the value and growth portfolios are themselves enhanced using market sentiment and financial health indicators.

The global financial crisis (GFC) has rekindled debate about the desirability of governmental interference in asset markets either through the operation of policy levers, or through the chosen institutional setup. In this article, we quantify economic costs because of mispricing of real assets in the USAGE model of the USA. The microeconomic costs of misallocated capital are small. The model suggests that regulators (or central banks) who risk mispricing by influencing asset prices do so without incurring large economic costs.

One of the necessary features of markets to produce efficient pricing is competition between information-based investors who quickly impound new information into price. However, a significant proportion of funds invested in todays equity markets are in the hands of managers who pursue a style that utilises little or none of the available information.We simulate such a market where the funds are being managed using the following three investment styles: fundamental, omentum and index. We confirm that the major pricing anomalies that have been highlighted previously in the literature are a natural consequence of competition between managers utilising these three investment styles.More importantly, we show that this situation is unlikely to change as long as markets continue to be dominated by costly active managers with clients who pursue outperformance.

The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobins q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro-cyclical. A two-year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one-half of a per cent. A 5-year `capital strike across the whole economy subsequent to the boom mimicking financial distress from a burst bubble shaves around 10 per cent off consumption. Given these significant costs associated with boom and bust equity markets, we consider some, policy options that might result in greater stability in these markets.

The scope of this is paper is to provide new empirical evidence on the value relevance of employee stock options (ESOs) in Europe. We show, empirically, that the market participants when pricing a firm's equity place approximately the same valuation weights on the ESO-deferred compensation expense (the so called ESO asset) and the compensation option liability (the so called ESO liability). Our empirical findings support the theoretical work of Ohlson and Penman who suggest that the deferred compensation expense be treated as a contra-liability. The second contribution of our work rests on the nature of the ESO expense. We show that the distinction between persistent and non-persistent ESO expenses is of critical importance for the market participants. Accordingly, an improved accounting disclosure should assist the investors in assessing the long-term goals of the ESO plans at the firm level

Capitalisation-weighted indexes provide the basis for passive investment strategies designed to capture market performance. However, these cap-weighted indexes are claimed to be sub-optimal because of their tendency to overweight overvalued shares and underweight undervalued shares. U.S. evidence suggests that fundamental indexes, which select, rank and weight stocks according to fundamental measures of size such as book value and revenue, outperform cap-weighted indexes. This study examines fundamental indexation in an Australian context over the period 1995 to 2006 and finds support for the U.S. results. However, we also find that the superiority of fundamental indexation is largely explained by its inherent bias towards value stocks, which raises the question as to whether a more overt value tilt may not provide a superior means for exploiting mispricings in markets.

The single-minded aim of retirement savings policy is to maximize after-cost returns to members while providing products and services to meet individual needs. In that it fails. The dominant cause of failure is ineffective and unnecessary competition. The dominant solution is greater cooperation. This article demonstrates how excessive competition has undermined investors ability to save for retirement through inefficient pricing, agency costs, and excessive choice. To ensure more cooperation, and less competition, the authors propose a three-pronged approach: structuring management arrangements to extract maximum economic growth and investment returns; taking steps to rid the system of over-servicing; and, structuring relationships to minimize agency costs. While the authors use Australia as their institutional setting, their (im)modest, and likely (un)popular proposal has universal (un)appeal and applicability.

Abstract: Purpose ? The purpose of this research is to study the extent to which various price and earnings momentum measures can be used to enhance portfolio performance by better timing entry into value stocks (and isolating those growth stocks that still have some period to run). Design/methodology/approach ? The paper uses the traditional methodology of ranking stocks on the basis of certain value and momentum measures (e.g. book-to-market, market return over some prior period), forming portfolios based on these rankings which are held for a specific period of time. The portfolios are formed on the basis of a single measure of multiple measures and the returns and associated p-values are calculated with the objective of determining how these portfolios perform relative to a benchmark portfolio composed of all the companies in the universe. The analysis is conducted on a database consisting of approximately 8,000 companies drawn from 15 European countries over the period from January 1989 to May 2004.

The well-documented market underperformance of the majority of value and growth stocks over a 12-month holding period reflects that traditional valuation metrics might tell us whether a stock is potentially cheap or expensive but little about when, or even if, it will experience a market correction. Two indicators have come to the fore in recent years that provide useful insights: sentiment/momentum and accounting fundamentals/financial health.We examine their single and combined impact on value and growth stocks and find that (i) they are effective in introducing a timing element into the selection of both value and growth stocks, (ii) the sentiment indicator completely dominates the financial health indicator and, (iii) both indictors contribute to the performance of the good and bad growth stocks. The size and significance of the investment profits that potentially can be generated using the two indicators in combination questions of the efficiency of the European equity markets.We conclude that our findings are consistent with the pricing cycle for a stock proposed by Lee and Swaminathan (Lee, C. and Swaminathan, B. (2000) Price momentum and trading volume, Journal of Finance, 55, pp. 2017?2069.) and the under- and over-reaction in pricing inherent in models proposed by Barberis et al. (Barberis, N., Shleifer A., and Vishny, R. (1998) A model of investor sentiment, Journal of Financial Economics, 49, pp. 307?343.) and Hong and Stein (Hong, H. and Stein, J.C. (1999) A unified theory of underreaction, momentum trading and overreaction in asset markets, Journal of Finance, 54, pp. 2143-2184.).

Simple financial ratios such as book-to-market are often used to identify value stocks. This paper examines the extent to which fundamental accounting information can be used to better identify truly undervalued value stocks to enhance profit in a simple value strategy. Gibbs sampling and model averaging are used in a logistic regression setting, employing fundamental accounting information as explanatory variables, in the design of an implementable investment strategy applied to markets in the US, the UK and Australia.

The level of informational efficiency of security markets has been a contentious issue among the academic and broader community over the last 35 years. This study highlights the growth in popularity in investment styles over this period, where investment decisions are made with only limited reference to available information and no concern with fair value (eg momentum investors and index investors). This paper models the market behaviour of fundamental, momentum and index investors and then simulates the behaviour of security prices in a market composed of investors following these three styles. Evidence is found to suggest that compositions of investment styles that are fairly typical of the mix of investors in current-day markets will lead to anomalous price behaviour similar to that found by other writers: an underreaction to new information which often gives rise to a subsequent overreaction

It has become more apparent in recent years that equity analysts come under much internal and external pressure that is likely to dilute the value of their forecasts and recommendations. In this paper we find, similar to Jegadeesh et al. (Jegadeesh, N., Kim, J., Krische, S., Lee, C., 2004, Analyzing the Analysts: When Do Recommendations Add Value? Journal of Finance 59, 10831124.), that Australian analysts consistently favour large high momentum growth stocks and that their recommendations, if anything, have negative value with the exception of those made in relation to low momentum growth stocks. However, we do find evidence to suggest that changes in the analysts' recommendations could provide a useful input into one's investment decisions. When we divided our sample up into the growth market of the late 1990s and the falling market of the early 2000s, we find that analysts were moving their recommendations (even) more towards high momentum growth stocks during the boom years but in the opposite direction during the gloom years.

In a previous paper ('The Performance of Value and Momentum Investment: Portfolios: Recent Experience in the Major European Markets', Journal of Asset Management, 4(4), 22146, 2003), the authors found that simple value and momentum investment strategies achieved good performance when applied to the major European markets since 1990. This paper extends this analysis to more complex strategies involving a combination of value and momentum investing, which were found to be particularly complementary and so give rise to exceptional investment outcomes. It is suggested that the findings support the existence of a value/momentum cycle along the lines of that proposed by Swaminathan and Lee ('Do Stock Prices Overreact to Earnings News?' Cornell Graduate School of Management Working Paper, 2000) and that this has very real implications for how managers might enhance either value or growth investment strategies.

Index funds have grown significantly in recent years in most of the developed markets as investors have become less satisfied with the performance of active managers. Further, the flow of funds to passive investing has been supplemented by a high level of quasi-indexing undertaken by numerous active managers fuelled by their perception that they have to strictly control their tracking error relative to their given benchmark. The focus of this paper is on the economic implications of this major swing to passive investing. In particular, the paper highlights that (1) the assumed constraints on the growth in passive investing envisaged by writers such as Lorie and Hamilton (1973) is never likely to come into play; and (2) a high level of passive investing is likely to contribute to excessive and wasteful investment which results in lower economic growth and investor returns. This all suggests that although a heavy reliance on passive investing might appear rational for investors, it may well prove not only to be to their economic detriment but also that of the national economy

This paper examines the attitudes of gamblers to risk as displayed by their betting behaviour on horse races. Although traditional economic theory assumes that individuals are averse to risk, numerous authors (e.g. Ali 1977; Asch, Malkiel and Quandt 1982; Snyder 1978 and Weitzman 1965) have produced empirical evidence to suggest that gamblers are in fact risk takers. This paper presents empirical evidence not inconsistent with these previous findings but proceeds to put a different interpretation on the results. In particular, we extend the traditional two moment utility model to include skewness. Arditti and others (Arditti 1967, 1971) have suggested that well-informed risk-averse equity investors should prefer positively skewed return distributions. Although the importance of positive skewness to these investors has been questioned (Francis 1975), we find that it is a characteristic that is strongly favoured by those who gamble on race horses. However, the introduction of skewness cannot alone explain another trait of these gamblers their willingness to participate m an activity which promises a negative return. In Section II we describe the data collection procedures and the method used in this study. The results reported in Section III are consistent with those in previous studies which concluded that gamblers are risk-takers. In Section IV the discussion of these results is extended to include skewness. The issue of why gamblers participate in a negative return activity is addressed in Section V. We conclude with a brief summary of our principal findings.

Working Paper Number: 1 <p>Abstract: Modern day equity markets are populated by investors pursuing a number of investment styles. In this paper we simulate the behaviour of investors pursuing various types of these styles in order to examine whether their interaction is a major contributing factor to inefficiencies within markets and particularly to the anomalous pricing behaviour identified in the literature. We found that small market fractions constituted by momentum and growth investors are very disruptive to markets, significantly increasing their volatility and causing mispricing for extended periods of time. They also induce an increase in both the risk and trading volume experienced by the other types of investors. We conclude that momentum and growth investing may be a source of the many market anomalies and serious thought should be given to policy, economic and social implications of equity pricing consistently not reflecting fundamental value.

Academic and professional attention has been devoted in the past to the analysis of the potential value-enhancement generated by strategies based on macroeconomic models and applied to portfolios or indexes of style classes. In this paper, we analyse the extent of the excess returns that can be potentially generated by rotating a portfolio between value and growth stocks in the European markets. We extend the results obtained by Bird and Casavecchia (Bird, R. and Casavecchia. L. (2007) Sentiment and financial health indicators for value and growth stocks: the European experience, European Journal of Finance, 13, pp. 769-793) when applying market sentiment and financial health indicators to stocks and document the extent to which macroeconomic factors convey information that is not already impounded in these indicators. We find that a strategy to rotate between portfolios, constructed on either single valuation metrics or their enhancement by market sentiment and a company&acirc;s financial strength, is typically consistent, monotonic, and in the expected direction. This highlights the proposition that the macroeconomic factors capture a cross-sectional variation that is not typically impounded in unconditional regression models on value and growth portfolios.

This paper presents a Bayesian technique for the estimation of a logistic regression model including variable selection. The model is used, as in Ou and Penman (1989), to predict the direction of
company earnings, one year ahead of time, from a large set of accounting variables from financial statements. We present a Markov chain Monte Carlo sampling scheme, that includes the variable selection
technique of Smith and Kohn (1996) and the non-Gaussian estimation method of Mira and Tierney (1997), to estimate the model. The technique is applied to companies in the United States, United Kingdom and
Australia. This extends the analysis of Ou and Penman (1989) who studied United States companies only. The results obtained compare favourably to the technique used in Ou and Penamn (1989) for all three
regions.